FocusChina petchems sticking to US dollar trade deals for now

15 July 2009 04:46  [Source: ICIS news]

By Fanny Zhang and Pearl Bantillo

GUANGZHOU (ICIS news)--Petrochemical players in China are showing little enthusiasm to settle foreign trade transactions in yuan after it has been made available, which analysts said is portent of the currency’s long and arduous trek towards global reserve status.

China, the world’s third biggest economy, has been calling for greater role in the international markets and has been drumming up the issue of having an alternative to the dominance of the US dollar in trade.

On 6 July, the country officially allowed cross-border trade between companies in Shanghai and Guangdong and companies in Macau, Hong Kong and ASEAN (Association of South East Asian Nations)-member countries to settle deals in yuan.

While good in theory in terms of providing reprieve to some who suffered heavy foreign exchange losses on the dollar’s weakness, its usage in actual trades would be limited in the near-term, market sources and analysts said on Wednesday.

Petrochemical traders said they have mostly adopted a wait-and-see attitude on how the introduction of a new currency for trade will pan out.

“So far we don’t see the necessity to participate. We don’t know whether there’s such a demand from customers [and] it takes time for the yuan to gain enough recognition,” said a Shanghai-based chemical trader.

Yuan as a new entrant in the international trade arena faces mounting scepticism from markets long used to dollar-denominated deals.

“Any new policy would take troublesome and resource-costing procedures in initial stages,” the trader said.

Other petrochemical players were hoping for some form of incentives from the Chinese government before plunging into the new trade scheme.

“If the government provides some preferable policies like cutting taxes and service charges to participants, we would like to have a try. Otherwise, we will continue the long-standing dollar-dominated settlement,” said a source at a state-owned petroleum trading company.

For companies with subsidiaries in Hong Kong and Macau, settling in yuan makes good sense as it meant by-passing currency conversions that could dilute earnings, depending on the prevailing exchange rate.

“We’ve submitted applications and will mainly adopt the programme to settle with overseas subsidiary companies,” said a source from a state-run chemical and oil giant Sinochem.

Given apprehensions on the use of yuan, which is not fully convertible, it would be difficult to replace the US dollar so easily in the next few years, economists said.

“Despite some nervousness about the role of the dollar, it is the only currency where the market is deep enough to accommodate the bulk of international reserves that are held by other central banks including China’s,” said David Cohen, regional economist at research company Action Economics.

While the country has allowed more flexibility in its exchange rate policy since July 2005, the yuan’s movement is largely controlled through heavy government intervention and mainly pegged against the US dollar, he said.

“Maybe at some point, the Chinese would look towards allowing its currency to float freely but I don’t think it is going to confront that issue anytime soon,” Cohen said.

The fragile state of the world economy would also hinder any major policy moves from governments like adopting a new currency for trade, said Vishnu Varathan, economist at consultancy firm Forecast.

“During this time, we are not going to venture into major policies until the basics are settled,” he said.

The global economy is still in recession despite some encouraging signs of recovery, analysts said.

“Within the next five to 10 years, the yuan may develop into a status comparable to other major economies in terms of convertibility,” said Cohen of Action Economics.

But for the Chinese currency to dislodge the US dollar as prime currency for trade is another matter, analysts and petrochemical players said.

“There are economies bigger than China but we have not been able to use their currencies in international settlement,” a Singapore-based fuel oil trader quipped.

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By: Fanny Zhang
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